Bitcoin in the "Middle Kingdom" is a new phenomenon, and it’s mostly used simply as a high-risk high-return speculation tools. Elsewhere, Bitcoin has already gained significant traction.
Last Monday (Oct.14 2013), Baidu, China’s biggest search engine, announced that its Jiasule unit will start taking Bitcoins as payment for their online security and firewall services. Right after the announcement, the value of Bitcoins has climbed as much as 16%.
What is Bitcoin?
Currently, there are 12 million Bitcoins in circulation with an approximate total value of 1.5 billion USD. People can now exchange Bitcoins with 16 different currencies. Bitcoin was started in 2008 by an anonymous developer known as ‘Satoshi Nakamoto’. It is a form of digital currency that can be saved in electronic wallets or Bitcoin exchange service websites.
To ‘mine’ Bitcoins, users need to solve highly complicated math problems, which normally require massive computing power and a huge supply of electricity. Normally, mining is done by a team of professionals equipped with super computers.
How ‘Bitcoin’ works
Bitcoin is based on three main technologies – Public key cryptography, P2P networking, and Time stamp network.
First, by applying the already existing cryptography and electronic signature technologies, Bitcoin can guarantee users’ anonymity and make transaction publishing possible.
Second, Bitcoin does not rely on central authorities. Instead, through a P2P network among clients, Bitcoin is created, distributed and spent. All the clients work as verifiers of the transactions.
Third, in order to prevent double spending, the time stamp network works to record the last transaction time of Bitcoins.
Lastly, the total number of Bitcoins to be issued is limited to 21 million, a limit that is expected to be reached in year 2140 since the amount of issuance halves every four years from 2012. As time goes by, the incentives of mining Bitcoins will get lower, while the value of Bitcoins will go higher.
Dangers of Bitcoins
Bitcoin has developed a reputation in the press as a currency for shady dealings, as can be seen from the recent Silk Road drug dealing website scandal. Indeed, Bitcoins carry with it some dangers not existing in regular currencies. First, Bitcoins can be easily destroyed in the occurrence of technical defaults and hackings. Second, Bitcoins are doomed to encounter deflation due to the issuance limit. Third, Bitcoin currency is extremely volatile. On 10thof April 2013, it was reported that the Bitcoin exchange rate dropped from $266 to $76 before returning to $160 within six hours. Lastly, there is always a possibility of the currency going completely obsolete with government interference.
Benefits of Bitcoins
In spite of dangers of Bitcoins, there are still a lot of advantages to this new virtual currency. The most important one is that it can be easily used for anonymous transactions. There is no central authority to regulate Bitcoins, allowing them to be used globally without any friction. There is also close to zero transaction rate (currently equivalent to five cents). Furthermore, the limits of currency issuance exempt it from inflation. For example, Bitcoins have gained traction as an alternative to the official currency in Argentina because of the nation’s double-digit inflation and strict capital controls
Where Bitcoins Lie
Although limits of Bitcoins are very clear, it holds some potential of disrupting money as we know it. It still lies mostly in the realm of speculators, but steps are being taken to increase the public awareness of Bitcoins and persuade businesses to accept it as currency.
Bitcoins provoke people to ask a fundamental question: What really is currency? The fact that a purely digital currency with supposedly no intrinsic value could now be accepted in daily transactions is testament to how fast our world is evolving. It is too soon to define it as the next step in the evolution of money, but we never know, Bitcoins just might beat coins.
By Mandy Shin